GDP Figures: How the Financial Times gets it wrong

David Henderson - March 2015


Speed Read
  • Dollar market exchange rates are erroneously used by many publications to make cross-country comparisons of GDP.
  • Exchange rates underestimate the relative size of developing economies and provide misleading estimates of important economic ratios such as energy intensity figures.
  • The United Nations System of National Accounts recommend the use of Purchasing Power Parity converters which account for cross-country differences in price levels.


The Financial Times has long been a continuing source of misleading statements about the relative size of the economies of different countries, as given by their real GDP - i.e. their output of goods and services. The months of October and November 2014 yielded a rich harvest of misinformation, involving ten FT staffers. In particular, I noted during these weeks twelve separate instances in which the GDP of developing countries was seriously understated.

In these as in many other cases (for the FT is far from alone), the error lies in taking dollar exchange rates for the period concerned as the basis for cross-country comparisons of GDP. As noted by the 1993 System of National Accounts (SNA) and its successor report of 2008, both endorsed by statistical agencies across the world, this procedure is invalid, because it does not correct for cross-country differences in price levels. To quote paragraph 38 of the opening chapter of the 1993 report: ‘Exchange rate converted data must not be interpreted as measures of the relative volumes of goods and services concerned’.

As has been recognised for decades, meaningful international comparisons of real GDP can be derived only when such corrections have been made, through the medium of estimated purchasing power parity (PPP) converters. The most recent and most comprehensive set of PPP-based estimates for the world as a whole covers the year 2011: it is the product of an impressive exercise carried out under the auspices of the International Comparison Program (ICP). As from July 2014, these latest ICP results have been incorporated into the statistical work of the IMF; and as from the latest (October 2014) issue, they are reflected in the database of the Fund’s World Economic Outlook (WEO).

FT staffers, in what appears as a standard formula, often refer to the Indian economy as ‘the third largest in Asia’, with China and Japan as (I quote) ‘Asia’s two biggest economic powers’. Aside from the fact that GDP is not and does not pretend to be a measure of ‘economic power’, these are misleading descriptions. The ICP PPP-based estimates for 2011 put the GDP of India as just over 30 per cent higher than that of Japan. Since then the disparity has widened, since the growth of output has been more rapid in India: for 2013, the difference appears to be close to 40 per cent. The Indian economy is clearly the world’s third largest, following the US and China but well above that of Japan. An exchange-rate-based comparison, by contrast, yields the absurd result (among a good many others) that it is the tenth largest, with the GDP of India for 2013 some ten per cent below that of Italy.

In two articles by FT staffers it was wrongly taken for granted, without reservation or qualification, that the economy of China, though the world’s second largest, remains considerably smaller than that of the US. It is true that, translated into US dollars at the going exchange rate, the GDP of China for 2013 appears as some 43 per cent below that of the US. But in the ICP report, the PPP-based gap for 2011 emerges as not much more than one-eighth. Over the following two years the GDP of China grew by an estimated 15.9 per cent, compared with 4.6 per cent for the US. As a result, the gap for 2013 is less than 4 per cent; and if the WEO projected growth figures for 2014 prove to have been near the mark, the economy of China may well appear as having overtaken that of the US in that year.

In an article of 20 November, FT staffer David Pilling drew uncritically on figures taken from a published paper by two Harvard professors, Lant Pritchett and Lawrence Summers (a former Secretary of the US Treasury). He quoted from the paper a rounded total of $11 trillion for the combined GDP of China and India in 2013, which the authors had taken as a point of departure. This is an exchange-rate-based figure, and puts the combined GDP at no more than 68 per cent of that of the US. In assessing the plausibility of this latter ratio, it is to be noted that the estimated primary energy consumption of India and China in 2013, taken together, exceeded that of the US by 52 per cent.

Through understating the relative GDP of countries such as China and India, the misleading impression is conveyed that these economies have relatively high energy intensities – i.e., high ratios of energy consumption to GDP. Taking the exchange-rate-based GDP figures, the energy intensity of the economy of China in 2013 appears as approximately two and one-quarter times that of the US. On a PPP-based comparison, the difference appears as less than 25 per cent. By the same token, the comparative ‘emissions intensity’ of China and other developing economies – that is, the ratio of their CO2 emissions to GDP- is likewise considerably overstated if exchange-rate-based figures for GDP are taken.

Besides India, China and Japan, misleading exchange-rate-based figures for GDP (or GDP per head) were given by FT staffers during these two months for Sri Lanka, Tajikistan and Indonesia. The latter case (30 October) had an aspect worth noting. By quoting only exchange-rate-based comparisons, misleading even when accurate (which in one case was not so), the author, David Pilling, missed the newsworthy fact that the PPP-based numbers show the GDP of Indonesia for 2013 as slightly higher than that of the UK.

In none of the cases that I have noted here did the FT staffers concerned refer to the existence of PPP-based estimates of GDP: with one partial exception, they wrote as though the misleading numbers that they quoted were the only ones available.

On 2 October, despite a good many past rejections, I sent a suitably concise letter on this subject to the editor of the FT. It was not published. Ever hopeful, I sent off a revised and updated text on 7 December. This second submission met with the same fate as the first.

All the above instances relate to comparisons of real GDP as between countries with widely different levels of GDP per head. But it is not only in this context that exchange-rate-based numbers can yield misleading results for the treatment and interpretation of data relating to GDP. To quote from a paper that I published almost ten years ago: ‘‘Exchange rates do not enter into the definition or measurement of either output (real GDP) or changes in output over time.’ I plan to develop this theme in a further posting.

PS It is to be noted that in a jointly authored column which appeared in the FT on 12 January 2015, three FT staffers (James Crabtree, Amy Kazmin and Victor Mallet) referred to India as 'the world's third largest economy, after the US and China, measured on a purchasing power parity basis’. This may be a happy augury.

This piece that follows is an expanded version of an entry that was posted on 7 January 2015 on the blog of the (London) Institute of Economic Affairs. As will appear, we look forward to publishing a successor article.